True v. United States, C82-052 to C82-056.

• Decision Date: 20 March 1985
• Docket Number: No. C82-052 to C82-056.,C82-052 to C82-056.
• Citation: 603 F. Supp. 1370
• Parties: H.A. TRUE, Jr. and Jean D. True, Plaintiffs, v. UNITED STATES of America, Defendant. Henry A. TRUE, III and Karen S. True, Plaintiffs, v. UNITED STATES of America, Defendant. David L. TRUE and Melanie A. True, Plaintiffs, v. UNITED STATES of America, Defendant. Donald G. HATTEN and Tamma T. Hatten, Plaintiffs, v. UNITED STATES of America, Defendant. Diemer D. TRUE and Susan L. True, Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Wyoming

603 F. Supp. 1370

H.A. TRUE, Jr. and Jean D. True, Plaintiffs, v. UNITED STATES of America, Defendant.

Henry A. TRUE, III and Karen S. True, Plaintiffs, v. UNITED STATES of America, Defendant.

David L. TRUE and Melanie A. True, Plaintiffs, v. UNITED STATES of America, Defendant.

Donald G. HATTEN and Tamma T. Hatten, Plaintiffs, v. UNITED STATES of America, Defendant.

Diemer D. TRUE and Susan L. True, Plaintiffs, v. UNITED STATES of America, Defendant.

Nos. C82-052 to C82-056.

United States District Court, D. Wyoming.

March 20, 1985.

R. Stanley Lowe, William H. Brown, Casper, Wyo., Claude M. Maer, Jr. and Fred M. Winner, Denver, Colo., for plaintiffs.

Dennis Donohue and Michael Lichtenberg, trial attys. for the Tax Div., Dept. of Justice, Washington, D.C., for defendant.

ORDER RULING ON MOTIONS FOR PARTIAL SUMMARY JUDGMENT

KERR, District Judge.

The above-entitled matter having come on regularly for hearing before the court upon plaintiffs' (cross) motion for partial summary judgment and the defendant's cross-motion for partial summary judgment; plaintiffs appearing by and through their counsel, William Brown, Claude Maer, Fred Winner, Stanley Lowe, and Ron Morris, and the defendant appearing by and through its counsel, Dennis Donohue, Tax Division, United States Department of Justice, and Michael Lichtenberg, Tax Division, United States Department of Justice, and the court having heard the arguments of counsel and having fully and carefully reviewed the motions, briefs, stipulation of facts, exhibits and all matters pertinent thereto, and being fully advised in the premises; FINDS:

The questions presented for summary adjudication are:

1. Whether civil penalties imposed under 33 U.S.C. § 1321(b)(6) are deductible.

Application of 26 U.S.C. § 162(f).

2. Whether surface damage payments are a cost of construction of an oil pipeline and, therefore, eligible for the investment tax credit.

3. Treatment of Guaranteed Minimum Overriding Royalties as advanced royalties.

The last issue will not be determined by the Court at this time as the matter is presently being considered by the Joint Committee on Taxation as the Internal Revenue Service has conceded the issue. The court, therefore, renders a decision only on the first and second issues.

As the parties have stipulated to the relevant facts and as it appears to the court that there is no dispute as to any material fact with respect to these issues, the same are ripe for summary judgment.

FACTS COMMON TO BOTH ISSUES

This case arises as the plaintiffs, taxpayers, seek a tax refund for the years 1973, 1974, and 1975. Each of the separate taxpayer cases have been consolidated because the facts, issues, and legal questions are the same in each case. This court has jurisdiction pursuant to 28 U.S.C. § 1346(a)(1).

Belle Fourche Pipeline Company (Belle Fourche) is a corporation engaged in the pipeline transportation of crude oil. During the years in question, 1973 through 1975, Belle Fourche was an electing corporation under Subchapter S of the Internal Revenue Code of 1954, as amended; § 1371 et seq. The plaintiffs in this case are the shareholders of Belle Fourche and as such, all adjustments made by the Internal Revenue Service to the corporation's net income flow through to the individual shareholders, thereby affecting the tax liability of each of the plaintiffs.

DEDUCTIBILITY OF OIL SPILL PENALTY

During the fiscal year ending March 31, 1975, Belle Fourche paid civil penalties in the amount of $1,200.00 to the United States Coast Guard. This penalty was assessed pursuant to 33 U.S.C. § 1321(b)(6), (§ 311(b)(6) of the Federal Water Pollution Control Act (FWPCA)). The penalty was imposed as a result of oil leakage from some Belle Fourche pipelines.

The Commissioner disallowed the deduction of the penalty in reliance on 26 U.S.C. § 162(f) which prohibits the deduction of "fines and similar penalties."

Code section 162(f) was enacted as part of the Tax Reform Act of 1969. The section provides that: "No deduction shall be allowed under subsection (a) deductions allowed for ordinary and necessary business expense for any fine or similar penalty paid to a government for violation of any law."

Prior to the enactment of this code section, the United States Supreme Court had held that taxpayers could not take deductions for fines paid for violations of state penal laws even if the violations were not willfully or knowingly committed. The United States Supreme Court reasoned that such a deduction would severely frustrate public policy and reduce the "sting" of the penalties where the fines had been levied for punitive purposes. See Truck Rentals, Inc. v. Commissioner, 356 U.S. 30, 36, 78 S.Ct. 507, 510, 2 L.Ed.2d 562 (1958) and Hoover Motor Express Co. v. United States, 356 U.S. 38, 78 S.Ct. 511, 2 L.Ed.2d 568 (1958) where fines paid to states for violation of the maximum weight limits on highways were not allowed as deductions for ordinary and necessary business expenses.

The Senate Finance Committee in its report on the 1969 Tax Reform Act acknowledged this existing case law disallowing deductions for fines and indicated that the enactment of § 162(f) was a codification of prior public policy.

The committee report states:

At the present time there is no statutory provision setting forth a general `public policy' basis for denying deductions which are `ordinary and necessary' business deductions. Nevertheless, a number of business expenses have been disallowed on the ground that the allowance of these deductions would be contrary to Federal or State `public policy.' This has been true, for example, in the case of fines. S.REP. No. 552, 91st Cong., 1st Sess. 273 (1969), reprinted in 1969 U.S. CODE CONG. & AD.NEWS 1645, 2027, 2310.

Following the 1969 enactment of § 162, the Internal Revenue Service issued proposed regulations on May 27, 1971. The regulations relating to § 162(f) suggested that all fines and penalties, whether criminal or civil, were not deductible.

The Senate Finance Committee in its Report on the Revenue Act of 1971 took an unusual step to comment on the proposed regulations and clarify the legislative intent behind § 162(f). The relevant portion of the report states:

In connection with the proposed regulations relating to the disallowance of deductions for fines and similar penalties (sec. 162(f)) questions have been raised as to whether the provision applies only to criminal `penalties' or also to civil penalties as well. In approving the provisions dealing with fines and similar penalties in 1969, it was the intention of the committee to disallow deductions for payments of sanctions which are imposed under civil statutes but which in general terms serve the same purpose as a fine exacted under a criminal statute. The provision was intended to apply, for example, to penalties provided for under the Internal Revenue Code in the form of assessable penalties (subchapter B of chapter 68) as well as to additions to tax under the internal revenue laws (subchapter A of chapter 68) in those cases where the government has the fraud burden of proof (i.e., proof by clear and convincing evidence). It was also intended that this rule should apply to similar type payments under the laws of a State or other jurisdiction.

On the other hand, it was not intended that deductions be denied in the case of sanctions imposed to encourage prompt compliance with requirements of law. Thus, many jurisdictions impose `penalties' to encourage prompt compliance with filing or other requirements which are really more in the nature of late filing charges or interest charges than they are fines. It was not intended that this type of sanction be disallowed under the 1969 action. Basically, in this area, the committee did not intend to liberalize the law in the case of fines and penalties. (emphasis added). S.REP. No. 437, 92nd Cong., 1st Sess. 73 (1971), reprinted in 1971 U.S.CODE CONG. & AD.NEWS 1825, 1918, 1979-1980.

The key point it seems in determining whether or not a civil penalty is deductible turns on the nature of the penalty; that is, whether the penalty serves a purpose similar to a criminal fine or penalty.

This is the view which has been expressed in the case law following the enactment of § 162(f). These later cases have developed certain criteria for determining whether or not a civil penalty is similar in purpose to a criminal fine or penalty. Specifically, a penalty is criminal in nature and, therefore, not deductible if its purpose is to punish and/or deter, but a penalty is not criminal in nature and, therefore, deductible if the purpose which it serves is to encourage compliance with the law or if it is remedial or compensatory in nature. Middle Atlantic Distributors v. Commissioner, 72 T.C. 1136, 1143 (1979); Southern Pacific Transportation Co. v. Commissioner, 75 T.C. 497, 652 (1980); Huff v. Commissioner, 80 T.C. 804, 824 (1983).

In Southern Pacific Transportation Co. v. Commissioner, 75 T.C. 497, 652 (1980) the court relying on Middle Atlantic held that:

congress, by use of the word `similar,' was not intending to distinguish between criminal and civil sanctions, but rather was intending to make a distinction between different types of civil penalties. If a civil penalty is imposed for purposes of enforcing the law and as punishment for the violation thereof, its purpose is the same as a fine exacted under a criminal statute and it is `similar' to a fine. However, if the civil penalty is imposed to encourage prompt compliance with a requirement of the law, or as a remedial measure to compensate another party for expenses incurred as a result of the violation, it does not serve the same purpose as a criminal fine and is not `similar' to a fine within the meaning of section 162(f).

The court further held that in deciding if a civil penalty is criminal in nature, "the appropriate consideration is not the type of conduct which gives rise to the...